EPF Big Update: A Provident Fund Account is a wonderful way to save for retirement. EPFO is in charge of millions of people's accounts. Both the employee's and the employer's basic income and dearness allowance are placed in these accounts in a 24% (12+12) proportion. The government sets interest on the cash deposited in this EPF account every year.
The current rate of interest is 8.5%. This results in a higher retirement fund. Furthermore, compounding interest works so well that with a 25-year investment, you can become a millionaire.
Total Sum of Money is Not Eligible for Interest
Account-holders commonly believe that interest is paid on the total amount put in the Provident Fund. However, this does not occur. The amount that goes to the pension fund in the PF account does not earn interest. You can see how much your basic salary and DA are on your monthly salary slip.
Every employee's EPF account receives 12% of their Basic Salary + DA. In addition, the employer contributes 12% of the basic wage + DA. By combining both funds, interest is earned on the money gathered. Interest is examined once a year, but the benefit of compounding interest is that there is a double benefit in interest.
On Rs 10,000 Basic, the Retirement Amount Will Be Rs 1.48 Crore
-
EPF member’s age 25 years
-
Retirement age 58 years
-
Basic salary Rs 10,000
-
Interest rate 8.65%
-
Salary increases 10% (Annual)
-
Total fund Rs 1.48 crore
Retirement Fund at Rs 15,000 Basic Salary
-
EPF member age 25 years
-
Retirement age 58 years
-
Basic salary Rs 15,000
-
Interest rate 8.65%
-
Salary increases 10% (Annual)
-
Total fund Rs 2.32 crore
How Interest Calculated on EPF?
The money put in the PF account every month, i.e., Monthly Running Balance, is used to calculate interest (EPF Crore Pati Calculator). It is deposited, however, at the conclusion of the year. If any cash is withdrawn in a year from the balance amount on the end day of the current financial year, it is subtracted 12 months interest, according to EPFO guidelines. EPFO always takes the account's beginning and closing balances. The monthly running balance is summed and multiplied by the interest rate / 1200 to arrive at this figure.
Loss of Interest by Withdrawing Money
If any money is taken out of the EPF within the current fiscal year, the interest is calculated from the beginning of the year to the month before the withdrawal. The closing balance (PF Balance) for the year will equal the initial balance plus any contribution withdrawals (if any) plus interest.
Think of it as
-
Basic Salary + Dearness Allowance (DA) = Rs 30,000
-
Employee Contribution EPF = 12% of Rs 30,000 = Rs 3,600
-
Employer Contribution EPS (Subject to limit of 1,250) = Rs 1,250
-
Total Monthly EPF Contribution = Rs 3,600 + Rs 2350 = Rs 5,950
Contribution In PF Till April 1, 2020
-
Total EPF Contribution in April = Rs 5,950
-
Interest on EPF in April = Nil (No Interest in First Month)
-
EPF Account Balance at the end of April = Rs 5,950
-
EPF Contribution in May = Rs 5,950
-
EPF Account Balance at the end of May = Rs 11,900
-
Monthly Interest Calculation = 8.50%/ 12= 0.007083% Interest calculation on EPF for May = Rs 11,900 * 0.007083% = Rs 84.29
EPF Interest Formula
The government announces the interest rate for each fiscal year. The interest calculation (EPF interest) is completed at the end of the current financial year. The interest amount is extracted by adding the balance amount on the last day of each month of the year, dividing that amount by the fixed interest rate, and dividing that amount by 1200.
